DEFINITION: The term “trust” refers to a legal entity endowed with distinct and separate rights; it is thus akin to an individual or a corporation.
A trust has the following structure: One party (the “trustor”), such as a bank or a court, confers upon a second party (the “trustee”) the authority to possess title to and oversee property or assets on behalf of a third party (the “beneficiary”).
Trusts are created for a variety of reasons. They may be initiated to furnish legal safeguards for the assets of the trustor, guaranteeing their allocation in accordance with predetermined intentions. They are also formed to protect the interests of beneficiaries who are minors.
Trusts can be very useful, having the capacity to streamline processes, to reduce paperwork, and, occasionally, to lessen inheritance (estate) taxes.
Trusts may also function as a closed-end fund structured as a public limited company.
ETYMOLOGY: The English noun “trust” is attested from the thirteenth century.It probably derives, via Middle English, from Scandinavian, possibly Old Norse traust, meaning “trust.” It is also likely akin to Old English trēowe, meaning “faithful.”
USAGE: The trustors, whether individuals or commercial or legal entities, who are authorized to establish trusts are also known as “settlors.”
The function of the settlors is to determine the allocation of a beneficiary’s assets to one or more trustees, and to subsequently manage and safeguard said assets on the beneficiary’s behalf.
The regulations governing a trust depend upon the purpose for which it was established, as well as upon particular features of the law in the jurisdiction where the trust is established.
For example, within certain legal jurisdictions beneficiaries are allowed to assume the role of trustees—that is, an individual who is the beneficiary of a trust may also serve as a trustee administering the trust.
The point of establishing a trust is to specify how the beneficiary’s finances should be supervised and allocated during his or her lifetime, or posthumously. Such a legal arrangement may be helpful in avoiding some taxes, or the entire probate process, for an estate.
In addition, a trust may be used to control the way an inheritance is distributed to the beneficiary. It may also be used to shield assets from creditors.
Further, a trust provides a method for protecting the interests of a beneficiary who is underage or otherwise unable to oversee his financial affairs himself—such as for medical reasons.
Once a beneficiary is judged to be capable of independently managing his assets, the trust may be dissolved, with its assets reverting to the direct control of the former beneficiary.
While there are various kinds of trusts, each one falls within one or more of the following broad categories:
1. Living or testamentary trusts: A “living trust,” also called an “inter-vivos trust,” involves an arrangement where an individual’s assets are placed within a trust for his or her personal use and advantage throughout his lifetime.
A living trust’s administration is overseen by a designated trustee, who is responsible for managing the trust and for transferring assets to the beneficiary upon the trustor’s demise. On the other hand, a “testamentary trust,” also known as a “will trust,” outlines the allocation of a beneficiary’s assets subsequent to the trustor’s passing.
2. Revocable or irrevocable trusts: A “revocable trust” permits the trustor to make modifications to, or to dissolve, the trust during his lifetime. An “irrevocable trust,” in contrast—as its name suggests—cannot be modified after it is established.
Living trusts may fall into either the revocable or irrevocable category. Testamentary trusts typically adopt an irrevocable nature when they are first established, although they may become revocable through a will while the trustor is still alive. Irrevocable trusts, due to their unalterable nature, facilitate the reduction or total avoidance of estate taxes.
3. Funded or unfunded trusts: In a “funded trust,” the trustor contributes assets during his lifetime, whereas an “unfunded trust” comprises only the trust agreement, without the transfer of any assets.
Unfunded trusts may either be endowed with assets after the trustor’s death or else remain without funding. Since the assets in an unfunded trust are vulnerable to risk—which it is the purpose of the trust to mitigate—it is important to ensure adequate funding.